Should colleges worry over plan to cap deductions?

This Oct. 14, 2010 photo provided by Colgate University shows the refurbished Case Library and Geyer Center for Information Technology, center, on the campus of Colgate University in Hamilton, N.Y. A $480 million fundraising campaign helped pay for this and other projects on Colgate’s campus, but possible changes in the tax law could affect donations to higher education. (AP Photo/Colgate University, Andrew M. Daddio)
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This Oct. 14, 2010 photo provided by Colgate University shows the refurbished Case Library and Geyer Center for Information Technology, center, on the campus of Colgate University in Hamilton, N.Y. A $480 million fundraising campaign helped pay for this and other projects on Colgate’s campus, but possible changes in the tax law could affect donations to higher education. (AP Photo/Colgate University, Andrew M. Daddio)
/ AP

In Colgate's recent campaign, nearly 35,000 people contributed something. But the campaign blew past its $400 million target on the backs of a much smaller group: about 1,000 donations of $25,000 or more, 91 of at least $1 million, and two of more than $25 million. Decock called it a "90-10 campaign" - 90 percent of the funds coming from 10 percent of donors, which is common for schools like Colgate.

But in fund drives at larger institutions, he said, the ratio is usually more like 97-3. Overall, at the largest universities, the three largest gifts alone account for about a quarter of all giving on average, and at smaller colleges they're about half, according to the Council for Aid to Education.

Wealthy families are more interested in supporting education, relative to other charities and income groups. More than 90 percent of household donations to education come from those earning $200,000 or more, according to Indiana University's Center on Philanthropy's most recent survey data, from 2005. For religious causes, less than one-third of household support came from those high earners. Eighty-three percent of millionaire households made donations averaging nearly $80,000 to education, compared to 11 percent of households earning under $100,000 who contributed on average $243 to education (the lower earners' contributions to religion, however, averaged $1,423).

The charitable deduction, which dates to 1917, would cost the government about $250 billion over the next five years, and proposals for reform vary. President Barack Obama has suggested limiting all deductions to a rate of 28 percent, which the Tax Policy Center has estimated would reduce overall giving about 2 percent, or $9 billion.

Others want a hard cap on all deductions - say $25,000 or $50,000, but possibly excluding charitable contributions. The Bowles-Simpson deficit commission has proposed almost the opposite approach: a floor, where the tax benefits kick in only after a certain amount of giving. That could do less to discourage philanthropy from the well-off.

In the Indiana survey of wealthy families, half said they would maintain their giving even if the deduction disappeared, while about 40 percent said it would decline and 10 percent said it would decline substantially. Economic models, meanwhile, have made varying predictions for how the different proposals might affect giving.

Duke University economist Charles Clotfelter is among those whose research leads him to conclude curtailing the deduction would have a substantial effect, and says colleges are right to be worried. Tax breaks aren't the main reason people donate, but he said seemingly small changes on the margins could have a big effect.

"The people that are giving the big gifts to universities are very sophisticated," he said. "They're having talks with their accountants and tax lawyers. They know what the effect is going to be."

Others, however, prefer to emphasize evidence that tax breaks are well down the list of philanthropic motives. One study found people already donate about twice as much as they can deduct (many wealthy families already hit deduction caps through the Alternative Minimum Tax). There are also countless billions given in charity - remittances abroad, gifts in kind, cash contributions - that aren't even eligible for deduction. That suggests taxes are a relatively small part of the equation.